The outcome of last month’s G20 summit in Pittsburgh has been depicted as a watershed in world economic history. By designating the G20 as the “premier forum” for managing the global economy, the communiqué recognised the major shift in economic power away from Europe and the United States to emerging powers in Asia, Africa and Latin America. The enthusiasm that surrounded the event has largely focused on the constructive role played by the Obama administration. After the tribulations of the Bush years, the United States has re-emerged at centre-stage of the process of international economic cooperation. Indeed, as the G20 takes over from the G8, there have been headlines describing a “new international order” and outlining how the Obama administration has successfully managed the transition.
However, in examining two of the critical proposals to come out of the G20 meeting, there are reasons to doubt the magnitude of the changes. The proposal for achieving a sustainable and balanced growth includes a peer-review mechanism for addressing the global imbalances which are said to have contributed to the global financial crisis. The G20 countries, under the aegis of the IMF, would work together to ensure that “fiscal, monetary, trade and structural policies” are consistent with more stable and balanced paths of growth. Although the details of the peer review are still to be worked out, its objectives and underlying logic are clear. Excessive consumption and free-flowing credit in the US are understood to have been fuelled by production and savings in trade-surplus countries such as China. The review mechanism will aim to boost domestic demand in these countries, and encourage savings in countries such as the US and UK.
While most countries agree that a more a balanced global economy is needed, with even the trade-surplus countries having been badly affected by the crisis as their outside sources of demand dried up, the responses to this proposal have been lukewarm. Emerging economies and developing countries, in particular, are sceptical about the supervisory role of the IMF unless its governance structure, which is largely under the control of the advanced economies, is reformed.
Addressing these concerns, the second critical proposal attempts to make the IMF more representative. At least 5% of the voting share would be transferred from ‘over-represented’ to ‘under-represented’ countries. Given the outdated structure of the IMF, set up in the post-World War II period when the United States dominated the global economy, a five percent transfer is not very large. However, there have been controversies surrounding even this small percentage, and the question of who should reduce their voting share is yet to be resolved.
As a result, the final communiqué only intimated that a transfer in voting shares would take place, but provided no detailed plans for how it would be done. Going forward, the issue of US veto power is likely to be crucial. With 17% of the votes in a system where major decisions require 85% consensus, the United States has effective veto power in the IMF. China, and other countries whose large foreign exchange reserves are crucial for sustaining the IMF, are understandably uncomfortable with the idea of devoting their resources to the organisation unless they have a larger say in its governance. Indeed, after their first summit earlier this year, the BRIC countries called for an end to the veto.
So far, the United States has shown no sign of giving up its effective veto over IMF decision-making, and consequently over the process of reforming the new international order. In a forthcoming paper for the Foresight project, we investigate the sources of this resistance, rooted in a historical conception of American exceptionalism which will be difficult to displace. This exceptionalist paradigm is shaped by a domestic polity that is fiercely committed to personal liberty, and thus deeply suspicious of governance at any level, let alone a global governance of the kind represented by the IMF. Throughout history, the only way that US Presidents have been able to overcome isolationist tendencies amongst the American people has been to articulate US foreign policy in terms of the ‘exceptional’ role and duty of the United States. Therefore, the rhetoric has not focused on American interests, but on advancing a common or global good that benefits people all over the world.
This propensity to universalise American values and objectives explains why US policy-makers so frequently attempt to prescribe the rules by which multilateral cooperation will take place. However, in a fast-changing world, marked by the rise of emerging powers, each with their own sense of exceptionalism, it is far from certain whether the United States will be able to maintain this approach. Having stood on the precipice of global financial disaster, the US administration knows that international macro-economic co-ordination has become more important than ever. Its proposal to set up a peer review mechanism under the aegis of the IMF is an important first step. If the US is serious about reform, it will need to abandon its veto power to ensure that the new peer review is truly representative and effective.
As the negotiations ensue, the critical issue will not be whether it is the G-8 or the G-20 that is the chief body, but whether the United States is ready to move beyond exceptionalism and reinterpret American identity to meet the new international reality.
Elena Jurado and Priya Shankar work at the international thinktank Policy Network. The “Foresight – forging common futures in a multi-polar world” project (www.foresightproject.net) is jointly organised with the Alfred Herrhausen Society, the international forum of Deutsche Bank.
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